Nomura Securities Sun: China's real estate bubble is emerging

Sun, Nomura's China chief economist, said that the real estate market has shown stunning resilience since 2009, with 1-May sales up 26.7% per cent year-on-year, and a 17.6% rise in the national average in May.　　He argues that the sudden recovery in the real estate market was sparked by a lot of stimulus from China, which boosted real demand, but the recent return of speculative home purchases has also shown signs of a real-estate bubble. Policy-driven demand blowout Nomura reports that since November 2008, the Government has adopted positive policies to promote residential demand.　　These include a reduction in lending rates (189 basis points on mortgage rates), a rise in mortgage rate discounts to 30%, cancellation of bank credit quotas and lower stamp duty and other property transaction taxes. He also said the release of pent-up demand last year may have further boosted demand.　　According to the rate of sales this year, the demand delayed in 2008 may reach 6 months of sales. The combination of positive policies and pent-up demand has led to a blowout in demand this year. As the recent surge in sales of furniture and decorating materials has shown (growth of 29.9% and 23.8% per cent year-on-year in April), the demand for April seems to be mostly self-contained rather than investment-oriented. But since May there have been sporadic signs that investors are returning to the market, and that the boom in buying homes in big cities such as Shanghai is pushing up prices.　　Rising house prices are eroding the affordability of households, fearing that they will soon be priced out of their homes and that buyers eager to own their homes have to speed up the pace of buying. "The average house price per square metre rose between December and May last year, which means that the purchase of the same 28 square meters per capita is now more than 22260 yuan, which is 40% higher than the annual disposable income (15781 yuan) per capita in 2008." No wonder everyone is busy buying a house now.　　Sun This explains the need for home buyers to purchase urgently. It's hard to predict when bubbles will burst. The surge in property sales has reduced house inventories. According to 3-May sales, the completed building area for sale is only sufficient to maintain two months of sales. and limited inventories encourage developers to accelerate their investments, as confirmed by the rebound in real estate investment this year.　　This helped to increase the amount of construction built (ie future supplies) from the equivalent of 18 months earlier this year to 26 months in May. Given the limited stock, some developers began to raise prices. With more easy access to bank loans this year and strong sales (up to $1 trillion in the first five months of 2009), cash-flow conditions have improved and developers now have far greater pricing power. So while house prices have risen 21.8% per cent from the end of last year, Nomura expects prices to continue to rise.　　They also warned that the housing bubble was clearly emerging. He pointed out that the rapid rise in house prices will erode the family's purchasing power, the whole country toThis is reflected in the rise in house/income ratios in big cities like Shanghai.　　This may not only cause social problems, but also threaten the sustainability of the housing market recovery.　　However, Sun admits that, despite the bubbles, they believe the government will not soon take drastic austerity measures to cool the property market, given the importance of the housing sector for jobs, consumption, investment and local government revenues. Even if the central government is willing to do so, the history of the 2003 has seen that only a strict, tight loan quota system is the only way to work.　　However, Sun said no real loan quotas would be implemented again. As a result, he expects a real-estate bubble to expand, possibly bigger than the 2007 bubble, due to a concentrated release of past and future demand. From the definition of bubbles, it is impossible to predict the end of the bubble and how much damage it could inflict on the banking sector and the entire real economy. But one thing is for sure-as long as the bubble bursts.